Saving for retirement

State Provision
 
The full basic state pension is a flat rate of £102.15 per week for a single person or £163.35 for a married couple for the tax year 2011/12, assuming that the individual claiming the benefit has made the relevant National Insurance Contributions throughout their lives. This maybe slightly more for married women who have worked and made National Insurance Contributions in their own right.
 
The pension is currently payable for a man on reaching his 65th birthday.
 
From 6th April 2010 the pension age for women is being raised gradually, with ladies born on or before 5th April 1950 entitled to their pension at 60 and those born on or after 6th April 1955 a pension age of 65. Those in between will see their retirement age rise depending upon their birth date to something in between.
 
In addition to the basic state pension there may also be an amount for those who have a relevant employment history, known as the State Earnings Related Pension (SERPs) and later replaced by the State second pension (S2P) in April 2002.
 
The state pensions received by those who are retired in the UK are actually paid from the National Insurance Contributions of those who are currently working, the amount paid out to an individual is not specifically linked to the amount that they paid in.
 
With a growing retired population in the UK, and less people to fund them, it is becoming increasingly important to save privately for your own retirement if you want a lifestyle which is anything other than basic!

Pension Simplification
 
From April 2006, known as 'A-DAY' the rules in relation to pensions were changed to create a more straightforward regime to make pensions easier to understand and encourage people to invest for their retirement.
 
Previously there were restrictions as to how much you were able to pay into pension depending up age (net relevant earnings) and numerous different pension rules based how pensions have evolved over the years.
 
Tax relief
 
Personal Contributions to a registered pension scheme are eligible to tax relief at an individuals highest rate of taxation with contributions of up to £50,000, this is known as the annual allowance.
 
You can contribute up to £3600 in each tax year if you do not have UK earnings but are resident in the UK for tax purposes. If you have earnings you can contribute as much as you are able to afford up to 100% of your earnings and receive tax relief on these amounts.
 
On any contribution an individual will receive tax relief at their highest rate of tax as follows:
 
For a basic rate tax payer investing £100 per month this contribution will be grossed up and £120 paid into the pension on your behalf.
 
For a higher rate tax payer investing £100 per month this contibution will be grossed up to £120 paid into the pension on your behalf when the contribution is made. You will then receive and the difference between basic rate and higher rate tax via your tax return. In this example this would mean an additional £20, giving £40.00 of tax relief in total.
 

This is more generous than the previous pension rules for net relevant earnings which allowed a percentage of your earnings which increased with age.
 
Those who wish to make contributions above the annual allowance of £50,000 can do so, however there would be tax implications to do this and we would recommend that you take additional advice.
 
For those people who are not resident in the UK for tax purposes, you are still able to make contributions to a pension but you would be receive tax relief.
 
The Lifetime Allowance
 
When taking benefits everyone has a maximum tax-exempt fund. For the tax year 2011/12 this is £1,500,000. Any amount over this limit is taxed at 55%, if taken as a lump sum or at 22% if this this used to provide an income, this income is then also taxable.
 
A lifetime allowance test is carried out when a "benefit crystalisation event" occurs. This could be when you choose use your pension fund to buy an annuity, take an unsecured pension to provide you with an income or transferring a pension overseas.
 
The requirement to 'do something' with your pension by the age of 75 has been removed.
 
Transitional Arrangements
 
Although the pension system is now much more straight forward this may not be the case for people who paid into a pension at any time prior to A-day.
 
For certain pensions the rules in relation to the Pension Commencement Lump Sum (previously tax free cash) available at retirement and the way in which your pension is taxed maybe slightly different to the new rules. Anyone planning to move their pension should ensure that they check how their pension is affected by the new rules to make sure that they do not lose advantage of any protections that they have been given or have elected to take on or before 6th April 2006. Please contact us for more information or assistance with this area of pension planning.

Occupational Pension Schemes
 
An Occupational Pension is one set up by an employer for the benefit of their employees.
 
They can be one of two types:

• Defined Benefit (also known as Final Salary)

  A pension which will proportionate to the salary that you receive when you reach, or shortly before you reach your retirement age.
   
  As your pension is directly linked to your salary at retirement it can make planning for retirement easier.
   
  The employer will need to estimate the amount required to provide your benefits at retirement which will be impacted by inflation and investment returns.
   
  This type of pension scheme can be very expensive and for this reason many private companies no longer offer entry to new employees, however schemes of this type are often accessible in the public sector or civil service where liability can be underwritten by government bodies.
  

• Defined Contribution (also known as Money Purchase)

  The contributions made by an employer and employee are invested for that individual. The fund that accumulates over the years to retirement are then used to purchase an annuity at the individuals retirement age. The amount of income received will depend upon how funds are invested and the rates available to an individual when they come to buy an annuity.

Most occupational pension schemes are set up into trust for members. This means that the assets (investments) within the fund are held by the trustees and are not available for use to the employer or their creditors. It is the job of the trustees to make sure that the interests of scheme members are protected and that all investments under the scheme are inline with the scheme rules and for the benefit of the members.

Personal Pensions
 
As with a defined contribution scheme a personal pension is an investment where an individual can save to provide a pot of money at retirement which is used to buy an annuity or, under new pension simplification rules an unsecured pension between the age of 50 & 75 or an alternatively secured pension on reaching age 75.

Stakeholder Pensions
 
Stakeholder pensions became available on 6th April 2001. They allow savings in the same way as a personal pension but are subject to a number of Department of Work and Pensions regulations, these include:

• A Maximum Plan Charge 
• A Minimum contribution no higher than £20 
• Since 8 October 2001, all employers with more than 4 employees must nominate a stakeholder arrangement that the employee can contribute to with deductions allowable from their salary 

Due to the rules applying to charges on a stakeholder pensions most of the facilities offered are reduced. For anyone who wishes to use a tax efficient means of saving for pension without lots of features should use a stakeholder pension.
 
Anyone who wishes to make more adventurous investment choices, such as pension investment to buy commercial property as part of a business or other self investment choices, a personal pension with higher charges may offer more flexibility.